Topic: Trade and Immigration

Antigua and Barbuda Raises the Stakes

$3.4 billion. That’s the price tag Antigua and Barbuda, the island nation which successfully argued that the United States was violating its obligations to open its market to foreign online gambling providers, puts on its lost revenues as a result of the U.S. ban on some internet gambling. (More here and here.)

They are seeking to recover the money by withdrawing the protection they provide for American intellectual property (see here). The idea behind this sort of action is to harness the power of a powerful lobby group (in this case, Hollywood and the software industry) to counteract the influence of anti-internet gambling groups: If intellectual property owners are caught in the cross-fire of the dispute, maybe the United States government would feel more pressure to comply with the series of rulings against current U.S. regulations.

The push to seek compensation through the World Trade Organization comes just one day after the European Union has indicated it wants compensation for the loss of market access, but through further opening of other sectors in lieu of lifting the ban. When the United States announced last month that it was responding to their loss at the WTO by seeking to “clarify” its commitments, they indicated that they would not provide compensation to Members harmed by the ban, as is called for by WTO rules. The USTR had reasoned that since they never intended to allow internet gambling in the first place (suggesting that their commitment to do just that was an “oversight”), then Members could not expect to receive any sort of compensation in return for solidifying the ban.

We’re planning to hold a forum on this topic on 25th July. Stay tuned for details.

More Farcical Trade Remedies Cases at the ITC

The menacing trade remedies laws have done their share to breed cynicism about U.S. free trade rhetoric. But this greeting on the website of the most recent U.S. petitioner is apropos of the tone conveyed by those laws.

Pretty scary, huh? Not as scary as being an importer of Chinese-manufactured, off-road tires, nowadays.

Having been acquainted with that grizzly, you shouldn’t be surprised to learn that Titan Tires, one of the biggest American manufacturers of tires for agricultural machines, went on the offensive Monday, when it (along with several labor unions) filed petitions with the U.S. International Trade Commission and the Commerce Department for relief from allegedly subsidized and dumped import competition from China.

To win trade relief, Titan et. al. will need to demonstrate that the domestic industry is materially injured or threatened with material injury by reason of subsidized or dumped imports. It’s generally not very hard to satisfy the meager statutory thresholds for demonstrating injury, but what is so absolutely stunning to those naïve enough to expect a modicum of justice from the process is how petitioners can distort the truth with impunity before the ITC.

Although most of the crucial economic facts are redacted from the public version of this latest petition (which is accessible on the ITC’s website), here is a sample of the injury argument presented therein. From page 18:

As the table below shows, Titan’s domestic production, capacity utilization, shipments and employment data all demonstrate current material injury.

Then there is a table with the relevant data for the periods 2004-2006 redacted. Then, on page 19:

Titan’s financial data regarding its certain OTR tire operations also indicate the company is experiencing material injury.

 Then there is another table with the financial data redacted.

So how can one know, without seeing those numbers, that petitioners are taking liberties with the truth? Well, beyond the grizzly on Titan’s website is a list of SEC filings, in which the company presents an entirely different assessment of its performance and prospects. Here’s the annual report from 2006, and here are some excerpts:

The Company recorded sales of $679.5 million for 2006, which were 45% higher than 2005 sales of $470.1 million. The significantly higher sales level was attributed to the expanded agricultural product offering of Goodyear branded farm tires and the expanded earthmoving, construction and mining product offering of Continental & General branded off-the-road (OTR) tires… Income from operations was $22.0 million for 2006 as compared to $12.0 million in 2005.

So the company’s sales were 45 percent higher in 2006, and its operating profits were 83 percent higher. The company’s first quarter 2007 10-Q filing reveals continued revenue and operating profit growth in 2007.

Titan is also having difficulty keeping up with growing U.S. demand:

Due to capacity constraints at Titan’s Bryan, Ohio, OTR tire facility, the Company is adding OTR tire capacity at its Freeport, Illinois, and Des Moines, Iowa, facilities.

Capital expenditures for 2006, 2005 and 2004 were $8.3 million, $6.8 million and $4.3 million, respectively. Capital expenditures in 2006 were used primarily for updating manufacturing equipment, expanding manufacturing capacity and for further automation at the Company’s facilities. Capital expenditures for 2007 are forecasted to be approximately $16 million to $18 million and will be used to enhance the Company’s existing facilities and manufacturing capabilities including additional capacity for OTR tire production.

Adding production capacity is not typical behavior for a company that is under assault by injurious imports. Adding capacity to the tune of more than doubling the previous year’s capital investment reflects confidence in the company’s future prospects. And confident, Titan should be:

As of January 31, 2007, Titan estimates $171 million in firm orders compared to $122 million at January 31, 2006, for the Company’s operations.

Titan’s 2006 Annual Report also boasts that $100 invested in Titan in 2001 would have been worth $436.47 at the end of 2006, whereas the same investment in the S&P 500 index would have been worth $135.03. That is some very impressive performance.

Of course, contrasting the dire self-assessments of industries petitioning for trade relief with the upbeat assessments of industries seeking to attract investors has been a favorite pastime of trade remedies’ observers. It’s been a running joke within the international trade bar that lying to the SEC lands you in jail, while lying to the ITC lands you protection from foreign competition.

You Mean It Could Get Worse?

The House Agriculture Committee yesterday released its preliminary discussion draft of the commodity section of the Farm Bill (the section that deals with the subsidy programs). But the changes proposed by Rep. Colin Peterson (D, Minn.), House Agriculture Committee chairman, are precisely the wrong sort of changes needed to avoid legal challenges to its farm programs and inject life into the Doha round of global trade talks.

Chairman Peterson has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices.

When farmers are paid according to the amount they produce, this encourages overproduction and depresses world market prices. That infuriates our trade partners, and we can expect more of the type of legal challenge to U.S. farm programs as the cotton case (more here) and the new case against U.S. farm subsidies brought by Canada (background here).

While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase. It makes no sense to increase the types of payments that are causing legal trouble. And if commodity prices fall from the current historic highs, then these subsidies would have a necessarily higher budgetary impact than the current setup.

My colleage Dan Griswold and I have proposed bribing farmers to let us scrap the whole thing altogether.

Bark Dwarfs Bite in China Currency Legislation

Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate.  As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives.  It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments. 

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress.  It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor. 

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame.  It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it. 

Here is the gist of the bill. 

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good.  Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage.  Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered.  The precise formula is still a bit unclear to me, though. 

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away.  As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country.   

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings.  That would lead, inevitably, to higher dumping duties.  

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill.  But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale.  The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/punitive measures on national economic security grounds.  That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively. 

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively.  Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices.  Congress promised to get tough if the administration continued to fiddle.  So it had to walk the walk.   

Despite some harsh provisions, it could have been worse.  Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative.  Here’s why. 

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued.  The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008.  The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005.  Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation.  By then—15 months from now—the Yuan is likely to have appreciated considerably more.  It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years.  If that is the case, there should be no need for action.  

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority.  But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.   

Thus, the preferable and much wiser gradual approach it is, by default. 

Back to Square One on Immigration

Opponents of comprehensive immigration reform are undoubtedly congratulating themselves on the apparent demise yesterday of S. 1348. The bill failed to win enough votes in the Senate for cloture and a final vote. Leading the charge to defeat the bill were a group of Republicans opposed to just about any legalization or expansion of visas for low-skilled workers.

We’ve made the case at the Center for Trade Policy Studies for an immigration system that recognizes the need of our growing economy for more foreign-born workers and the benefits we would enjoy from more legal immigration. The only alternative offered by opponents of reform is to spend more on the same enforcement efforts that have failed in the past to stop illegal immigration. Conservatives who are normally skeptical of big government place all their hope in dramatic increases in spending for border enforcement, longer fences to nowhere, more raids on U.S. workplaces, and more red tape and national ID cards for American workers.

The bill before the Senate was flawed in many ways. The number of temporary worker visas was insufficient, its interior enforcement provisions too intrusive, the point system too convoluted. But the bill was at least pointing in the right direction.

The Republicans who brought the bill down have yet to put forward any practical and principled alternative.

House Subcommittee on Horticulture and Organic Agriculture Does Their Bit For Fiscal Responsibility

Following on from Chris’ post yesterday, the House Subcommittee on Horticulture and Organic Agriculture came up with some nifty recommendations for the programs under their jurisdiction yesterday. The press release is here.

Take particular notice of the operative words in the paragraph that outlines the proposals. The clauses begin with, respectively: expands, doubles, extends, requires, funds, expands, provides, establishes, authorizes, and establishes. Nary a “cuts,” “abolishes,” “ends,” or “repeals” in sight.

I have searched thoroughly through my pocket Constitution (available here) but I can’t find the basis for these (or, for that matter, many other) government programs anywhere.

Tony Blair’s Wise Warning against ‘Isolationism and Protectionism’

In an essay published this week by the Economist magazine, outgoing British Prime Minister Tony Blair shared “What I’ve Learned” during his decade in office. I’ll leave it to others to dissect what he said about the transatlantic alliance, the Iraq War and the National Health Service, but his words of wisdom on the importance of an open global economy are worth quoting.

Declaring that “‘Open v closed’ is as important today in politics as ‘left v right,’” Blair wrote:

Nations do best when they are prepared to be open to the world. This means open in their economies, eschewing protectionism, welcoming foreign investment, running flexible labour markets. It means also open to the benefit of controlled immigration. For all nations this is a hugely contentious area of policy. But I have no doubt London is stronger and more successful through the encouragement of targeted migration.

Isolationism and protectionism now cut across left and right boundaries. They are easy tunes to play but pointless in anything other than the very short-term.

I wish more members of the U.S. Congress would learn the same lessons.